Cryptoasset fraud investigations and asset tracing
April 2022 | TALKINGPOINT | FRAUD & CORRUPTION
Financier Worldwide Magazine
April 2022 Issue
FW discusses cryptoasset fraud investigations and asset tracing with Carmel King at Grant Thornton.
FW: Could you provide an overview of the growth of cryptoassets in recent years? How would you characterise their evolution and popularity?
King: Engagement with cryptoassets has risen at a phenomenal rate in the last few years. In its ‘2022 Crypto Crime Report’, blockchain analytics platform Chainalysis reports that in 2021, the total transaction volume across the cryptocurrencies it tracks grew to $15.8 trillion, up an incredible 567 percent from 2020. Transactions relating to non-fungible token (NFT) trading totalled $44.2bn, with NFT of course being Collins Dictionary’s word of the year for 2021. People are buying into cryptoassets for a wide variety of reasons. It is increasingly mainstream. Transferring between fiat currency and crypto can now be done easily via apps, and of course many people have spent considerable time at home in the last two years on their ‘phones’. Some look at the volatility in the market and believe it may still be possible to get rich quick, or they at least have a fear of missing out or they mistrust traditional financial institutions. Many want to understand the market, and cryptocurrency is a relatively accessible way of dipping a toe into the world of blockchains, NFTs, decentralised finance (DeFi) and the metaverse.
FW: Could you outline the potential risks associated with cryptoassets? In what ways are they being used to perpetrate fraud, for example?
King: Like all financial spaces, fraudsters are present and looking to exploit any opportunities for gain. Chainalysis has reported that illicit transactions in 2021 amounted to $14bn, up from $7.8bn in 2020. Two factors work in the fraudsters’ favour – the pseudo-anonymous nature of this space and the fact that investors often regard this space as something highly technical which they should not expect to understand, let alone carry out due diligence on, prior to paying anything over. As a result, you get frauds like AnubisDAO, an investment opportunity which offered no white paper or website, no code audit and where the developers used pseudonyms. They raised almost $60m in 20 hours which promptly disappeared. The developers blamed one another; the founder blamed a phishing attack. The investors lost both their capital and any value that the ANKH token might have had.
FW: To what extent has the coronavirus (COVID-19) pandemic served to increase the prevalence of cryptoassets in fraud schemes? Does a lack of systemic safeguards only intensify the problem?
King: It is difficult to separate the pandemic effect from the other factors that have caused cryptoassets to go mainstream, but it has certainly had an impact. Anecdotally, we are seeing a steady stream of victims of investment fraud who first engaged with fraudsters via advertisements on social media. Initial investment amounts may be modest, but victims soon find themselves subject to high-pressure sales techniques to invest more, and unanticipated charges and costs if they attempt to exit the schemes. We are also seeing personal accounts being hacked and contacts being encouraged to invest in fraudulent schemes. Beyond cryptocurrencies, OpenSea has reportedly taken enforcement action on 3500 collections of NFTs every week for counterfeit or copyright reasons, and the platform is under pressure to do more to counter the sale of plagiarised material. With a move toward regulation and increased engagement on the part of tax and law enforcement authorities, it would not necessarily be true to say there is a lack of systemic safeguards, but certainly more could be done to protect consumers.
“The best investigations are a combination of blockchain analytics, corporate intelligence and legal applications.”
FW: Although many cryptoasset firms are developing controls to reduce financial crime, are you seeing innovations across assets, exchanges or tools being used to enhance anonymity and defeat know your customer (KYC) and fraud prevention techniques?
King: The technology in this space is moving rapidly and fraudsters have the agility to move with it. In recent times, that may have involved the use of mixers and tumblers to obfuscate movements or exchanges in far-flung or unidentified jurisdictions to cash out. Mixers can increasingly be unpicked, and though still a challenge, most exchanges will cooperate in the face of a freezing or disclosure order. Accordingly, fraudsters are moving on, for example to DeFi, using platforms that do not hold funds or take KYC information, rendering them impervious to freezing or disclosure orders. I envisage that exchanges will evolve into two broad tiers: the mainstream providers and those in tricky jurisdictions disinclined to assist fraud investigators. Stolen or off-the-shelf IDs are already in common use. Artificial intelligence and deepfakes may play a part in the near future.
FW: Given the semi-anonymous nature of cryptoassets, and the fast pace of changing technology and regulation, what strategies are typically deployed when investigating and tracing crypto assets? How are investigators using technology, such as data analytics, to identify cryptoassets tied to fraud?
King: The best investigations are a combination of blockchain analytics, corporate intelligence and legal applications. Blockchain analytics trace the movements of the assets and using attribution technology can identify whether wallets are known to be associated with particular types of fraud or with exchanges. In almost every case we see there is some ‘real-world’ thread that can be investigated, for example a website, company or individual name or phone number. None of these may be legitimate, but applying open-source intelligence, some social media or domain name searches, for example, may provide far more useful context and provide avenues of pursuit beyond the blockchain activity. Finally, English courts are at the forefront of this space, granting freezing and disclosure orders and most recently third-party debt orders against bad actors.
FW: What legal challenges or impediments may potentially arise when seeking to obtain information on cryptoassets or initiate their recovery? What steps can be taken to overcome these obstacles?
King: A legal defence increasingly seen in proprietary claims against cryptoassets held in specific wallets is that the recipient did not knowingly receive the proceeds of fraud. Overcoming this obstacle relies on a robust blockchain analytics report clearly setting out the context of the fraud. More practical impediments can include costs and the exchanges. Victims of fraud are not always able to fund complex recovery actions, and so funding or professionals working on an ‘at risk’ basis may be required, or a combination of both. Finally, identifying the location of exchanges and being able to exert sufficient leverage to obtain their cooperation in freezing assets, disclosing information or satisfying third-party debt orders in this space, has required some creative thinking.
FW: How do you envisage the process of investigating and tracing cryptoassets evolving in the years ahead? Is there likely to be a constant battle between investigators and fraudsters as they try to keep one step ahead of each other?
King: Every arena of financial crime could be described as a constant battle between investigators and fraudsters, and this is no different. Fraudsters have some advantages: they are not burdened by the law or by jurisdictional limits, and they are very well funded. Given the pace of technological change, in years to come this space may be unrecognisable. Between investigative technical capabilities and the engagement of the courts and regulators, we are seeing some really positive progress. I hope we will see increased international cooperation, the engagement of tech giants in the protection of consumers and the availability of recourse for lower-level investors. Each of these factors would dramatically improve confidence in this space, making the entire ecosystem a safer and more everyday place to play for everyone.
Carmel King is a director in Grant Thornton’s Insolvency and Asset Recovery practice and a founding member of the Crypto Fraud and Asset Recovery (CFAAR) network. She specialises in asset tracing and recovering funds for clients who have suffered a financial loss as a result of fraud. She has 15 years’ experience of using insolvency proceedings, court-appointed receiverships, other civil procedures and litigation funding to conduct investigations, formulate legal claims and enforce judgments. She can be contacted on +44 (0)20 7865 2359 or by email: carmel.king@uk.gt.com.
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